Major Pros and Cons of Taking Out a Personal Loan in Your 20s

Your 20s are probably the first generation in your life in which you will come across serious financial decisions that can have lasting impacts on your life. From leasing your first apartment, to paying taxes, to buying an expensive bottle of champagne, or maybe even start your own small business. Chances are good it’s all going to happen for the first time in your 20s. 

Another first-time financial decision that is likely to take place in your 20s is to take out a personal loan

If you are thinking about taking out a personal loan in your 20s, here are a couple pros and cons that you should consider before you sign on the dotted line. 

Before we go into that though, it is important to consider the fact that not all 20-somethings are created equal. Some have great credit scores and a lot of money in the banks. Others have less-than-great credit scores and their bank account is overdrawn. It’s all specific to you, as are these general guidelines.

That being said, take a look at these pros and cons to get the ball rolling on whether or not you think you need a personal loan. 

Pro: You can consolidate your credit card debt

Another financial decision you will likely make in your 20s is to take out a credit card. And if you are like the millions of Americans right now, chances are good you are carrying around quite a bit of debt on your credit card. 

The reason why taking out a personal loan to bring your credit card debt back down to zero is a good idea is because the vast majority of personal loans typically have far lower interest rates than credit cards. 

So, say you have $15,000 worth of credit card debt that you are looking to pay off and your card has a 15 percent interest rate. 

If you decided to take out a loan worth that same amount that had a 10 percent interest rate as opposed to the 15 percent one of your card, you would end up saving over $11,000 dollars. How crazy is that?!

Also, you would be able to bring your credit card balance back down to zero, meaning you would not have to worry about maxing out your card while you work to pay off your benefit. The other benefits of personal loans in order to consolidate credit card debt include:

  • Personal loans are paid off in installments and have an end date. 
  • You would make monthly payments as opposed to multiple payments to your multiple credit cards
  • You would (most likely) be paying less interest over time

Con: You might be tempted to misuse your loan 

Unlike car loans or mortgages, personal loans can be used for basically anything. If you are thinking about taking out a loan for a specific reason, make sure that you have the emotional maturity necessary to use it for that actually reason as opposed to just living lavishly for a few weeks or months. 

If you are thinking about taking out a personal loan to invest in a business you are interested in starting, taking classes to expand your marketable skills, or something that is necessary to a happy and healthy life, that is typically a good thing to do!  

However there are some common large expenses that you probably will want to find a different way to pay for. Those include:

  • Paying your bills – If you are struggling to pay your bills, you might feel like taking out. Loan to cover them could be a good idea. However, keep in mind that once you have the money, you will basically be paying more bills in the form of your monthly payment. If your life is already too expensive, consider cutting back on expenses rather than taking out a personal loan. 
  • Big purchases – this is another thing to avoid taking out a personal loan for. Even if the big purchase feels necessary, chances are good you can wait the weeks or months it will take to save up from your income and pay for the big-ticket item with your own money. 
  • Vacation – this is another one that you should save up for. Even if you think you deserve that two-week long vacation to Europe, if you don’t have the money to pay for it out of your own pocket, you should do it. It’s that simple. 
  • Wedding – this is another big decision that people make in their 20s. One of the biggest mistakes you can make is letting your wedding cripple you financially. Not only will it have a lasting impact, it will also possibly muddy the experience and ruin what should be one of the most memorable days of your life. 

Pro: It could help you improve your life 

So we just went over some big-ticket items you should not use a personal loan on, but what are some of the right things to use a personal loan on? Basically, if you think a personal loan can help you improve your life and earning potential in the future, it is probably a good idea. 

Whether it’s relocating to a location where you can pursue your dreams, education so that you can gain the skills you need to target the job you want, or starting the business that you think is the next big thing, a personal loan is a pretty good idea! 

Think about it, a personal loan is an investment in yourself. If that loan will help you be more valuable in the future, it is likely very much worth the money you will be paying month to month. 

Con: High interest rates are possible 

This is something to absolutely keep in mind. Just because it is likely that personal loans come with lower interest rates than credit cards does not mean that you won’t be paying a lot to take out the loan. 

If you aren’t positive what an interest rate even is – it’s quite simple. Basically, an interest rate is the amount of money that you are paying to take out the loan reflected in a percentage of the overall loan. So, the higher the interest rate you have, the more you will be paying to take out the loan. 

If you have bad credit, you will likely face high interest rates. While it might be worth it if you are in serious need of a personal loan, the amount you will be paying – and whether or not you can actually afford it – is absolutely something you need to consider before you take out a personal loan.

Adam Hansen

Adam is a part time journalist, entrepreneur, investor and father.